Foreign account information-sharing agreements
2014 legislation to enable NZ's intergovernmental agreement with the USA that clarifies NZ institutions' reporting obligations under FACTA.
Sections BB 3(2), BH 1(5B), DB 1(1)(bb) and section YA 1 of the Income Tax Act 2007; sections 3, 22(2)(lc), 143(1)(ab), 143(2B), 143A(1)(ab), 173B and 185E–M (Part 11A) of the Tax Administration Act 1994
New Zealand has entered into an intergovernmental agreement (IGA) with the United States to clarify the reporting obligations of New Zealand financial institutions under the United States law commonly known as the Foreign Account Tax Compliance Act (FATCA).
Amendments to New Zealand's tax legislation were required to bring the IGA into domestic law and allow New Zealand financial institutions to comply with its terms.
FATCA requirements took effect from 1 July 2014. Accordingly, this is the effective date for the new provisions.
The United States has enacted a law commonly known as the Foreign Account Tax Compliance Act, or FATCA.
It requires foreign financial institutions (including New Zealand financial institutions) to enter into individual reporting agreements with the United States' Internal Revenue Service (IRS). These agreements require the institution to report to the IRS account information on accounts held (and certain accounts controlled) by United States taxpayers – or otherwise have a 30% withholding penalty imposed on certain United States-sourced income that they derive.
Because of domestic legal constraints, the Government understands that New Zealand financial institutions would be unable to comply with these individual reporting agreements, effectively leaving financial institutions with the choice of:
- not investing either directly or indirectly into the United States (to avoid the withholding penalty); or
- investing in the United States and incurring the withholding penalty.
To alleviate these concerns, and to reduce compliance costs more generally, the Government has entered into an intergovernmental agreement (IGA) with the United States. Many other countries (including Australia, the United Kingdom, Germany and Canada) have signed similar agreements with the United States and many more are still negotiating such agreements.
Under the IGA, instead of sending account information individually to the IRS, New Zealand financial institutions will instead send the information to Inland Revenue, which will exchange it with the IRS. The IGA is reciprocal, meaning that New Zealand will also receive information about certain accounts held by New Zealand residents with United States financial institutions.
It was necessary to amend the Income Tax Act 2007 and the Tax Administration Act 1994 to enable financial institutions to comply with the terms of the IGA.
The Income Tax Act 2007 and the Tax Administration Act 1994 now contain "foreign account information-sharing agreement" as a defined term. The first such agreement is the IGA with the United States. There may be other similar agreements entered into in the future. For this reason, the legislation is deliberately broad in its nature—so other agreements can, if possible, be accommodated with as few legislative amendments as possible.
Although this broad drafting is deliberate, the IGA is currently the only agreement of this type that New Zealand has entered into. As it uses defined terms in the IGA, it is recognised that the relevant provisions and terms may have limited or no application to other similar agreements that may be entered into in the future.
Status of the agreement
The IGA, and other similar agreements that New Zealand may enter into in the future, are defined as "foreign account information-sharing agreements". The new legislation introduces this concept as a defined term in section YA 1 of the Income Tax Act 2007, and a cross-reference to that definition in section 3 of the Tax Administration Act 1994.
Amendments to sections BB 3(2) and BH 1(4) clarify that foreign account information-sharing agreements will be "double tax agreements for the purposes of the Income Tax Act". This means the agreements, like other double tax agreements and tax information exchange agreements, have effect despite anything in the Inland Revenue Acts, the Official Information Act 1982 and the Privacy Act 1993. New section BH 1(5) states that proposed part 11B of the Tax Administration Act 1994 applies to these agreements. This simply clarifies that part 11B sets rules for these agreements despite their generally overriding nature.
Part 11B of the Tax Administration Act 1994 contains the operative provisions that govern how foreign account information-sharing agreements are brought into New Zealand law. A consequential amendment has moved the definition of "competent authority" from section 173B to section 3 of this Act.
Part 11B contains provisions that implement foreign account information-sharing agreements. These provisions are important because, for the New Zealand Government to comply with its obligations under such an agreement, it is required to obtain and exchange certain information with a foreign government. It is necessary to have rules that require the relevant New Zealand taxpayers to acquire this information and provide it to the New Zealand Government, so this exchange can take place.
This part of the Act therefore provides the compulsion for New Zealand taxpayers to obtain this information and pass it on to Inland Revenue. It comprises the following sections:
185E - Purpose
This section sets out the purpose of the Part, which is to give effect to and implement foreign account information-sharing agreements.
Section 185F - Permitted choices
The IGA contemplates that financial institutions may have choices in the way they comply with the agreement. Equally, the agreement allows the New Zealand Government to make choices that could have consequences for the affected financial institution. The choices a person makes will determine the way the agreement applies to them. Section 185F is designed to recognise these choices, and then authorises a person to make them and treat such choices as being binding for the purposes of the agreement and the person's obligations under the agreement.
Section 185F(1) identifies these choices. Section 185F(2) explicitly authorises a person to make such a choice and anything necessarily incidental to give effect to that choice. Section 185F(3) clarifies that a person's obligations are modified to the extent necessary to give effect to that choice.
This is important because financial institutions should not be in a position where they are required to comply with all possible scenarios that an agreement contemplates. An institution that makes a choice should be accountable for the consequences of that choice—but not be punished for failing to take the alternative option. In other words, the provision allows a financial institution to make, and carry into effect, a choice contained in the relevant agreement. It is not intended to compel a financial institution to make all possible choices.
Under the IGA, New Zealand has a number of choices it can make at government level. As the IGA is a double tax agreement, these choices will be made by the Commissioner of Inland Revenue. Section 185F caters for these choices and allows the Commissioner to publish a choice made or revoked in a publication of the Commissioner's choosing (see subsection (4)). The method of publication is broad, to allow the Commissioner maximum flexibility in the publication method, which may be important in terms of quickly communicating decisions.
In relation to the IGA, the Commissioner has made three choices in accordance with section 185F - with this Tax Information Bulletin [Vol 26, No 7 August 2014] (along with the Inland Revenue website) being the Commissioner's publication of choice for these purposes. Reporting New Zealand financial institutions are permitted to:
- rely on due diligence procedures in the United States Treasury Regulations in lieu of procedures in Annex I of the IGA (per Annex I (I)(C) of the IGA);
- use third-party service providers to fulfil the obligations imposed on such institutions as contemplated by the IGA (per Article 5(3) of the IGA); and
- rely on due diligence procedures performed by third parties to the extent provided in relevant United States Treasury Regulations (per Annex I (VI)(F) of the IGA).
It is important to note that these choices are accurate at the time of publication, but may be varied or revoked by future action or regulatory change. Notification of any changes will be made by the Commissioner at that time.
Effect of choices
Section 185F(5) clarifies that choices made by the Government or by an affected person are treated as part of the agreement for all aspects of Part 11B and section BH 1 of the Income Tax Act 2007.
The general ability to make choices is removed if the choice is an "excluded choice" under sections 185F(6) and (7). Having these particular choices as "excluded" is intended to prevent unnecessary reporting of accounts. The IGA provides for certain reporting thresholds. An example being that a financial institution does not have to report on a "depository account" with an end of reporting period balance of US$50,000 or less.
Without the excluded choices provision, a financial institution could report on these low value accounts if it was administratively more convenient for it to do so. However, given the privacy concerns surrounding the exchange of personal data, it was not considered appropriate for low-value accounts to be reported.
It is important to note that the "excluded choice" wording does not prevent the financial institution from gathering relevant information on account opening (or any other time designated under the agreement); it merely prevents the provision of that information to Inland Revenue.
Section 185G of the Tax Administration Act - Registration
The IGA provides that financial institutions that meet certain requirements must register with the United States IRS. Section 185G brings the aspects of this registration requirement relevant to the financial institution into New Zealand law.
Section 185H of the Tax Administration Act - Due diligence
The IGA also sets out detailed due diligence obligations for affected financial institutions. Section 185H therefore clarifies that a financial institution is required to apply the relevant procedures. The relevant procedures may depend on permitted choices that the Government and/or the financial institution will have made. A financial institution is only required to perform the due diligence procedures that flow from permitted choices they have made.
Section 185I of the Tax Administration Act - Information for New Zealand competent authority
Section 185I is the central provision for ensuring New Zealand's compliance with foreign account information-sharing agreements. In essence, it says that if New Zealand is obliged to obtain and exchange information with a foreign competent authority, the person described or contemplated in the agreement as obtaining and providing the information must obtain and provide it to the New Zealand competent authority. All relevant steps in relation to obtaining and providing that information must be done in accordance with the agreement.
In the IGA context, this means that any information the New Zealand Government is obliged to exchange with the United States must be obtained by New Zealand financial institutions and provided to Inland Revenue.
The section allows the provision of information if it is not required for exchange purposes, as long as obtaining and providing that information is contemplated in the agreement.
As with the other operative provisions, the relevant information may be dependent on choices that the Government and financial institution have made. Section 185I compels the person to provide whatever information is produced from the exercise of their choices. The provision of this information is not optional—however, the composition of this information will depend on choices made.
The section is designed to neither force a financial institution to report on the maximum or minimum number of people. Such an obligation would be impossible to enforce in any event because it may not be known at the time the choice is made what the exact consequences of that choice will be. An institution is simply required to follow the consequences of any choices made. However, to the extent that obtaining and providing the information is not described or contemplated in the agreement, there is no statutory protection for a person that obtains or provides it.
The section also clarifies that the Government may wish to make regulations in this area (under the existing regulation-making power in section 224 of the Tax Administration Act 1994) to spell out any finer details in a person's reporting obligations.
Section 185J of the Tax Administration Act - Information for third parties
The IGA contemplates that a financial institution may have to provide information to third parties. These third parties could be foreign competent authorities or other financial institutions. Section 185J authorises obtaining and proving this information, provided it is described or contemplated in the agreement.
For foreign competent authorities, the request for information must be "validly requested" under the terms of the agreement. In the IGA context, a "valid" request from the United States competent authority is one where the competent authority has reason to believe that a minor or administrative error may have led to incorrect information reporting. It is anticipated that these requests will be made when the Internal Revenue Service is attempting to quickly resolve simple queries. Where it is unclear whether a request is strictly of a "minor or administrative" nature or whether the request is actually more substantial, the competent authority at Inland Revenue will be available to assist financial institutions in making this judgement call, if the need ever arises.
Again, this section clarifies that the Government may wish to make regulations in this area (under the existing regulation-making power in section 224 of the Tax Administration Act 1994).
Section 185K of the Tax Administration Act - Prescribed form
Section 185K allows the Commissioner to prescribe the form in which information is received. This is particularly important for foreign account information-sharing agreements because it may be that the form of the information is set by either a foreign competent authority or other international organisation. Some flexibility to set these forms is therefore crucial to the smooth administration of these agreements.
Section 185L of the Tax Administration Act - Anti-avoidance
Section 185L is an anti-avoidance provision that allows an arrangement to be treated as having no effect if the main purpose of entering into the arrangement is to avoid a person's obligations under part 11B. This provision recognises that some people may not want to report on their customers for commercial/compliance costs reasons. However, in entering into foreign account information-sharing agreements, the Government is agreeing to obtain and provide certain information. The ability to unwind arrangements that avoid reporting is a requirement of the IGA.
Section 185M of the Tax Administration Act - Timeframes
Foreign account information-sharing agreements may not set a specific reporting period. For example, the IGA states that relevant account balances or values "shall be determined as of the last day of the calendar year or other appropriate reporting period" (emphasis added).
In New Zealand most businesses have systems designed to report on a tax-year basis. Section 185M therefore provides that, when an agreement or regulation does not specify or is discretionary as to a reporting period, that period will be a tax year, from 1 April to 31 March. For the IGA, this means that the "appropriate reporting period" will be the year ended 31 March.
When an agreement or regulation does not specify or is discretionary about the time in which a person must provide the information to Inland Revenue, it must be provided within three months of the end of the period. For the IGA, as the reporting period ends on 31 March, the information must be provided to Inland Revenue by 30 June of that year.
The definition of "tax return" in section 3 of the Tax Administration Act sets out that information provided in the form set out in section 185K is not a tax return for the purposes of the Act.
Section 22(2)(lc) has been added to the Tax Administration Act to clarify that a taxpayer must keep sufficient records to allow the Commissioner to readily ascertain the person's compliance with part 11B. This makes it a statutory requirement for an affected person to collect and keep the information necessary for compliance with a foreign account information-sharing agreement. It also ensures that the records must be kept for the statutory record-keeping period set out in section 22.
Failure to keep documents required by this provision will result in an absolute liability offence under section 143 or a knowledge offence under section 143A, as applicable.
Sections 143(1)(ab) and 143A(1)(ab) introduce an "absolute liability" offence and "knowledge" offence related to a person's failure to register with a foreign competent authority as required by part 11B.
These offences enable New Zealand to comply with obligations under the IGA, and possibly future agreements. New Zealand has an obligation under the IGA to rectify what is known as "significant non-compliance" through its domestic law.
The main form of non-compliance that existing legislation did not appear to address was if a financial institution failed to register. The amendments to sections 143 and 143A provide the legislative sanction to support section 185G, which, as mentioned above, requires a financial institution to comply with any registration requirements in a relevant agreement. However, to recognise the fact that a failure to register may occur for circumstances beyond the control of the person concerned, section 143(2B) provides an exclusion from the absolute liability offence if the relevant failure to register occurred through no fault of the person.
Deductions for withholding
Under section DB 1 of the Income Tax Act 2007, various types of taxes are disallowed as deductions for income tax purposes. Section DB 1(1)(bb) states that any withholding that a person suffers under FATCA law (in particular under section 1471 or 1472 of the United States Internal Revenue Code) is not available as a deduction, even if the general permissions for deductions are satisfied.
The amendments apply from 1 July 2014.